Warning
Your brokerage statement shows a cost basis for your MLP. It's wrong — potentially by thousands of dollars. Brokers never receive your K-1, so they never adjust your basis for distributions, income allocations, or depreciation. The number they report to the IRS on your 1099-B is your purchase price, not your actual tax basis. If you sell based on their number, you'll report the wrong gain.
See the gap between your broker's number and your real basis
The free K-1 Basis Tracker calculates your IRS-adjusted basis from your K-1 data — so you know the real number before you sell, not after.
In the K-1 tracker, typing your numbers in uploads nothing; an uploaded K-1 PDF is read by a third-party AI provider. Privacy
Open K-1 Basis Tracker (free)The Problem Every MLP Investor Faces
If you own MLP units and plan to sell — or have already sold — your brokerage almost certainly reported the wrong cost basis to the IRS. You are either setting up a mismatch that triggers an IRS notice, or you're overpaying taxes without realizing it.
This isn't a quirk, a glitch, or a rare edge case. It's structural. It affects every MLP investor who has held units through at least one K-1 cycle. And the longer you've held, the wider the gap.
When you buy shares of Apple, your broker tracks cost basis perfectly. You buy at $150, your basis is $150, and when you sell, the 1099-B matches reality. Stocks are simple — cost basis equals purchase price, adjusted only for splits and reinvested dividends.
MLP units don't work this way. Every year, your MLP sends a Schedule K-1 that adjusts your cost basis — distributions reduce it, allocated income increases it, and your share of partnership liabilities shifts it further. But your broker never sees the K-1. They only know what you originally paid.
Warning
After just a few years, the gap between your broker's reported basis and your real IRS-adjusted basis can be thousands of dollars. When you sell, that gap becomes a tax surprise — and the IRS already knows the right number because they receive a copy of every K-1.
Why Brokers Get It Wrong — The Structural Explanation
It's not that brokers are doing anything wrong — they simply don't receive the data. The K-1 goes directly to you (the limited partner), not to your brokerage. The IRS Partner's Instructions for Schedule K-1 explicitly state that partners must maintain their own basis records.
This creates a permanent information gap:
What your broker knows
- Purchase price per unit
- Number of units held
- Trade date
- Dollar amount of distributions paid
What your broker doesn't know
- K-1 income allocations (Box 1)
- Distribution character (ROC vs taxable)
- Your share of partnership liabilities (Item K)
- Deductions, credits, and other adjustments
- Suspended passive losses under §469(k)
- Cumulative depreciation recapture (§751)
Every item in the right column affects your cost basis. Every year. And every year the broker doesn't adjust, the gap compounds. For K-1s from private partnerships there is no brokerage statement at all — if basis was never tracked, it must be rebuilt from the full K-1 history, which is a private partnership basis reconstruction engagement rather than a tracking problem.
Key Insight
The AICPA Tax Adviser has confirmed this structural issue: brokers do not normally receive the annual Schedules K-1 and do not have the information to adjust the cost basis in client account records. This is not a recommendation to track basis — it's a statement that no one else will do it for you.
The $4,200 Gap — A Worked Example
Here's what the basis gap looks like in practice. These are illustrative figures based on typical midstream MLP K-1 patterns.
Worked Example: 200 Units at $42.00
Purchase: 200 units at $42.00 = $8,400 total cost basis
Holding period: 5 years
Annual distributions: $3.20/unit = $640/year = $3,200 total over 5 years
K-1 adjustments: Each year, the K-1 allocates modest income (Box 1) that partially offsets distributions. But depreciation-related deductions typically exceed income, resulting in net basis erosion of roughly 75–85% of distributions received.
Now the investor sells at $50/unit ($10,000 proceeds):
That's a $2,700 discrepancy in reported gain. And a portion of that $4,300 is §751 ordinary income — taxed at your marginal rate (up to 37%), not the capital gains rate.
The investor who trusts the broker's number faces two possible outcomes: report the broker's inflated basis and receive an IRS notice, or reconstruct the real basis and report the correct (larger) gain. Neither is pleasant — but one comes with penalties and interest attached.
Estimate Your Basis Gap
Enter your position details to see a rough estimate of how far off your broker's cost basis might be. This uses average ROC percentages for midstream MLPs — your actual gap depends on your specific K-1 data.
Basis Gap Calculator
Estimate how far off your broker's cost basis might be
What Happens If You Use the Wrong Basis
Using the wrong basis doesn't just mean paying the wrong tax amount. It puts you in one of three scenarios, two of which create additional problems.
Scenario A: Under-reported gain (most common)
You report the broker's inflated basis → your reported gain is too small → the IRS cross-references your K-1 data through their Automated Underreporter (AUR) system → you receive a CP2000 notice (proposed changes to your return) → you owe the additional tax plus interest calculated from the original due date. If the understatement exceeds the greater of 10% of the correct tax or $5,000, accuracy-related penalties may apply (20% of the underpayment under IRC §6662).
Scenario B: Over-reported gain (less obvious)
Each year your K-1 allocates income that increases your basis — and you pay tax on that income. If you don't add those increases to your basis at sale, you over-report your gain, effectively paying tax on the same income twice: once through the annual K-1 and again through an understated basis at disposition. The IRS won't send you a refund for overpaying — you'd need to file an amended return (Form 1040-X) to claim it back.
Scenario C: Correct basis reported
You track your basis using each year's K-1 data → you report the K-1-adjusted basis on Form 8949 with code B in Column (f) → the IRS matches and accepts your return → you pay exactly the right amount. This is the expected procedure for every MLP sale.
Warning
The IRS can see everything. They receive a copy of every K-1 issued to you. Their AUR system automatically flags discrepancies between 1099-B reporting and K-1 basis data. This isn't an audit — it's automated matching that catches mismatches with high reliability. Don't assume the broker's number will go unnoticed.
The Form 8949 Fix — How to Report the Correct Basis
When you sell MLP units, your broker sends a 1099-B with their version of cost basis. You must correct this on Form 8949. Here's the step-by-step process:
Column (a): Description
Enter the MLP name and number of units sold (e.g., "200 units EPD").
Column (d): Proceeds
Enter the total sale proceeds as reported on your 1099-B.
Column (e): Broker's basis (as reported on 1099-B)
Enter exactly the basis your broker reported. Don't change this — it needs to match the 1099-B copy the IRS already has.
Column (f): Adjustment code
Enter code B — indicating the basis reported by your broker is incorrect. Code B is used for both short-term and long-term MLP sales. If the basis was not reported to the IRS at all (1099-B Box 3 is unchecked), report on Box C (short-term) or Box F (long-term) of Form 8949 and enter your correct basis directly.
Column (g): Adjustment amount
Enter the difference between the broker's basis and your K-1-adjusted basis. This is typically a negative number (reducing your basis, which increases reportable gain). For the worked example above: −$4,200.
Key Insight
This adjustment is standard IRS procedure for MLP sales. It will not trigger additional scrutiny. In fact, the absence of this adjustment when the IRS has K-1 data showing basis changes is more likely to trigger a notice. TurboTax and other tax software have specific fields for Form 8949 adjustments — look for "I need to adjust my basis" during the sale entry process.
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How to Find Your Real Basis
You know the broker's number is wrong. Here are your three options for finding the correct one — in order of effort and reliability.
Use a basis tracking tool (recommended)
The K-1 Basis Tracker implements the full IRS Partner's Basis Worksheet (all 18 lines). Enter your K-1 data for each year, and it calculates your adjusted basis automatically. Pre-configured for major MLPs including Energy Transfer (all three sub-entities), EPD, MPLX, PAA, and WES.
Reconstruct manually from K-1s
Gather every K-1 from every year you've held the MLP. Work through the IRS Partner's Basis Worksheet for each year sequentially — each year's ending basis is the next year's starting basis. This is labor-intensive but accurate. If you've lost K-1s, contact Tax Package Support for the specific MLP (e.g., taxpackagesupport.com/et for Energy Transfer) to request historical copies.
Check your Sales Schedule (year of sale only)
If you've already sold, your final K-1 package includes a Sales Schedule that shows the partnership's calculation of your adjusted basis and §751 recapture. This is useful for the year of sale but doesn't help you plan before selling — and you should verify their numbers against your own records.
See the gap between your broker's number and reality
The free K-1 Basis Tracker calculates your IRS-adjusted basis from your K-1 data. Enter your data for any major MLP and see exactly how far off your broker's cost basis is — before you sell, not after.
In the K-1 tracker, typing your numbers in uploads nothing; an uploaded K-1 PDF is read by a third-party AI provider. Privacy
Open K-1 Basis TrackerThe Compounding Problem — Why Waiting Makes It Worse
The basis gap doesn't just grow linearly — it compounds. Each year, distributions reduce your basis while the broker's number stays frozen. As distributions increase (as they do for MLPs like EPD with 26+ years of growth), the erosion accelerates.
Year 1–3: The gap is modest. Maybe $500–$1,500. You might not even notice.
Year 4–7: The gap becomes material. $2,000–$5,000 for a mid-size position. Enough to change your tax bill significantly.
Year 8+: The gap can exceed 50% of your original purchase price. Your basis may be approaching zero, at which point distributions become immediately taxable as capital gain under §731 — even without selling.
Warning
The reconstruction burden grows too. If you've ignored basis tracking for 10 years, you need 10 years of K-1s to reconstruct. Each year's calculation depends on the prior year's ending basis. You can't skip years or estimate — a gap in year 3 makes every subsequent year wrong. Start tracking now, even if you need to go back and fill in prior years.
Special Cases That Make the Gap Worse
- Energy Transfer (ET) — three-entity complexity: Your broker shows one cost basis for ET. But you actually own interests in three separate PTPs (ET, USAC, SUN), each with its own basis. When you sell, all three dispose simultaneously with separate §751 recapture calculations. The broker's single number is wrong in three different ways.
- Merger conversions: If you acquired MLP units through a merger (e.g., ETE→ET, ENBL→ET, CEQP→ET), your initial basis depends on the exchange ratio in Form 8937 — not the predecessor's trading price. Brokers sometimes carry forward the old ticker's basis incorrectly.
- DRIP (Distribution Reinvestment Plans): If you reinvest distributions, each reinvestment creates a new tax lot with its own cost basis. The distributions still reduce your basis on the original lots. This creates an exponentially complex tracking problem that brokers handle poorly for partnerships.
- Inherited MLP units: If you inherited units, your basis should be the fair market value on the date of death (stepped-up basis under §1014). But the broker may still show the decedent's original purchase price. And if the decedent didn't track basis correctly, the stepped-up amount may be wrong too.
The Bottom Line
- 1.Your broker's MLP cost basis is almost certainly wrong after the first K-1 year
- 2.The IRS expects you to maintain your own basis using K-1 data — no one else will do it
- 3.When selling, override the broker's basis on Form 8949 with code B in column (f)
- 4.The longer you hold, the larger the gap — and the bigger the tax surprise
- 5.Start tracking now. Every year you wait adds another K-1 to reconstruct later
Frequently Asked Questions
If you own MLP units and have received at least one K-1, your broker's cost basis is almost certainly wrong. Brokers track your original purchase price and never adjust for K-1 activity — distributions, income allocations, liability changes, and deductions. The only exception would be if you bought and sold within the same tax year before your first K-1 was issued. For any holding period that spans a K-1, the broker's number diverges from reality.
On Form 8949, report the broker's basis in Column (e) exactly as shown on the 1099-B. In Column (f), enter adjustment code B — indicating the basis reported by your broker is incorrect. In Column (g), enter the adjustment amount — typically a negative number that reduces your basis, increasing your reportable gain. Code B is used for both short-term (Part I) and long-term (Part II) transactions. This is standard IRS procedure for MLP sales and will not trigger additional scrutiny.
Code B on Form 8949, Column (f) indicates that the basis reported to the IRS by your broker on Form 1099-B is incorrect and you are providing the correct figure. Code B is used for both short-term (Part I, Box B) and long-term (Part II, Box E) MLP sales — the same column (f) code applies regardless of holding period. It tells the IRS you are overriding the broker's basis with your K-1-adjusted basis. The IRS expects this adjustment for partnership sales.
Yes. The IRS receives a copy of every Schedule K-1 issued to you. Their automated matching systems (AUR — Automated Underreporter) cross-reference K-1 data against your filed return. If you report the broker's inflated basis without adjustment, the IRS knows your K-1 tells a different story. This is one of the most common triggers for CP2000 notices (proposed changes to your return).
File Form 1040-X (Amended Return) for any open tax year — generally the last three years. If you underreported gain by using the broker's inflated basis, you'll owe additional tax plus interest from the original due date. Filing a voluntary amendment before the IRS contacts you typically avoids penalties. If you overreported gain (didn't add K-1 income increases to basis), you can amend to claim a refund.
From the date you acquired the units. Your basis tracking must start with your initial purchase (or merger conversion, gift, or inheritance) and include every K-1 adjustment through the year of sale. If you've held for 10 years, you need all 10 K-1s. Missing years create gaps that compound — each year's ending basis is the next year's starting basis. If you've lost old K-1s, contact Tax Package Support for the specific MLP to request historical copies.
Disclaimer: This content is for educational and informational purposes only. It does not constitute tax, legal, or financial advice. MLP taxation involves complex rules including basis tracking, §751 recapture, passive activity limitations, and multi-state filing. Consult a qualified tax professional before making tax or investment decisions.
Lucas Andersen is not a CPA, Enrolled Agent, or tax attorney. Information reflects rules as of the date published and may change. Always verify with current IRS guidance.